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Low Income Housing Tax Credit Projects and Energy Conservation; Utility Calculator Analysis: Policy Options

Washington State Housing Finance Commission

June 17, 2011

LIHTC Utility Calculator Policy Analysis June 17, 2011 Washington State Housing Finance Commission i

S U B M I T T E D T O :

David Clifton Washington State Housing Finance Commission 1000 2nd Avenue, Suite 2700 Seattle, WA 98104-1046 206-287-4407 206-254-5357 Fax [email protected] www.wshfc.org

S U B M I T T E D B Y :

David Paul Rosen & Associates

1330 Broadway, Suite 937 Oakland, CA 94612 510-451-2552 510-451-2554 Fax [email protected] www.draconsultants.com

3941 Hendrix Street Irvine, CA 92614 949-559-5650 949-559-5706 Fax [email protected] www.draconsultants.com

LIHTC Utility Calculator Policy Analysis June 17, 2011 Washington State Housing Finance Commission ii

Table of Contents

Assignment Overview................................................................... 1

Executive Summary ...................................................................... 2

Key Findings ................................................................................. 4

Advantages.............................................................................. 4

Disadvantages ......................................................................... 4

Conclusion ................................................................................... 5

1 Introduction........................................................................ 6

1.1 Federal Utility Allowance Regulations................................. 6

1.2 WSHFC Utility Allowance Policy ........................................ 7

1.3 Overview of other State ECM Policies................................. 8

1.4 Economic and Policy Benefits of the ECM........................... 8

1.5 The Functions of a Utility Calculator................................. 11

2 Case Studies ...................................................................... 12

2.1 Kentucky Housing Corporation ......................................... 12

2.2 Florida Housing Finance Corporation................................ 13

2.3 Ohio Housing Finance Agency.......................................... 14

2.4 Texas Department of Housing and Community Affairs...... 14

3 California Utility Allowance Calculator ............................ 15

3.1 CUAC Program Background and Goals............................. 15

3.2 How CUAC Works............................................................ 15

3.3 CUAC Process, Rules and Administration.......................... 16

LIHTC Utility Calculator Policy Analysis June 17, 2011 Washington State Housing Finance Commission iii

3.3.1 Selection Criteria for Energy Consulting Firms ............. 16

3.3.2 Monitoring Utility Tariffs............................................. 16

3.3.3 Owner Submission Requirements................................ 17

3.3.4 TCAC review .............................................................. 17

3.4 Existing Buildings Policies ................................................. 17

3.5 CUAC’s New Online Interface .......................................... 18

3.6 Cost of Developing and Administering CUAC................... 19

4 Issues and Considerations Regarding Use of a Utility Calculator in Washington State......................................... 20

4.1 Appeal of the ECM Option to Owners............................... 20

4.1.1 Utility Cost Structure................................................... 21

4.1.2 PHA Estimates............................................................. 23

4.1.3 Units at Maximum Rents Allowed by Regulation......... 23

4.1.4 Alternative UA Estimate Options................................. 24

4.2 Accuracy of Estimates ....................................................... 25

4.3 Underwriting and Leverage............................................... 26

4.4 Retrofit financing .............................................................. 26

4.5 Developer, Investor and Lender Incentives and Barriers to Participation ..................................................................... 26

5 Administrative Issues......................................................... 28

5.1 Selection of Energy Consultants ........................................ 28

5.2 Costs of Developing and Administering a Utility Calculator Program ............................................................................ 28

6 Key Findings...................................................................... 30

6.1 Advantages........................................................................ 30

6.1.1 Accurate Utility Tariffs .................................................. 31

6.1.2 Reliable Consumption Estimates ................................... 31

6.1.3 Transparency................................................................ 31

6.2 Disadvantages ................................................................... 32

LIHTC Utility Calculator Policy Analysis June 17, 2011 Washington State Housing Finance Commission iv

6. 2.1 Front-end and Administrative Costs.............................. 32

6.2.2 Limited Benefits............................................................ 33

6.3 Conclusion ........................................................................ 33

7 Next Steps......................................................................... 34

L I S T O F T A B L E S

Table 1: Leveraging Potential of Monthly Utility Allowance Reductions ........................................................................ 10

Table 2: PHA Electric Monthly Utility Allowances for 1 Bedroom Units in Multifamily Buildings, Among a Sample of PHAs in California and Washington juristidctions .......................... 22

Table 3: Estimated WSHFC LIHTC Units at Maximum Regulatory Rents................................................................................. 24

LIHTC Utility Calculator Policy Analysis June 17, 2011 Washington State Housing Finance Commission 1

Assignment Overview

The Washington State Housing Finance Commission (WSHFC) retained David Paul Rosen & Associates (DRA) to provide recommendations to assist WSHFC in advancing the following policy goals:

! Lowering energy and water consumption in affordable multifamily rental properties consistent with State law and the goals of the Washington Sustainable Energy Trust; and,

! Employing energy cost savings to help finance affordable multifamily housing in the form of increased leverage or cash flow.

DRA examined methods for WSHFC to achieve these goals though the strategic use of its Low Income Housing Tax Credit (LIHTC) utility allowance authority. In 2008, the Internal Revenue Service amended its utility allowance rules, giving state allocating agencies new flexibility in approving project-specific utility allowances. As a result, energy efficient (and water conserving) properties can qualify for substantially lower utility allowances. By lowering utility allowances, LIHTC owners are able to increase affordable rents, thereby increasing leverage, cash flow or both.

In this report DRA reviews different approaches used by state allocating agencies to administer utility allowance options including the California Utility Allowance Calculator (CUAC). CUAC represents a national best practice approach to the administration of utility allowance policy.

DRA recommends next steps regarding a utility calculator tool, based on its advantages and disadvantages, and its appropriateness for WSHFC.


Executive Summary

Recent amendments to Section 1.42-10 of the Internal Revenue Code give state allocating agencies new authority and greater flexibility over the determination of utility allowances (UA) at individual low income housing tax credit (LIHTC) projects. This authority equips LIHTC state allocating agencies with strategies and tools for promoting energy efficiency, renewable energy and water conservation in both new and existing LIHTC properties.

Among the various new UA estimate options authorized under the revised regulations, the Energy Consumption Model (ECM) is perhaps the most promising in terms of advancing energy and water conservation in LIHTC projects. Under the ECM option, a building owner may calculate UAs based on consumption estimates. UA estimates can be established in advance of construction, renovation or retrofit activity, and in so doing become a tool for underwriting future utility cost savings arising from investments in conservation. These projected savings can be used to leverage all or a portion of additional financing necessary to pay for the investments. Alternatively, lower utility allowances can be used simply to stretch public funds with additional private financing, or they can be used to improve the financial conditions of properties through increased cash flows.

The efficacy of the ECM option as a strategy for achieving these policy objectives depends upon the magnitude of UA reductions likely to be realized by using this option, and the extent to which UA reductions will enable LIHTC owners to increase rents. In this regard, the value of the ECM option hinges chiefly on four variables:

1) Washington State utility costs and the potential economic payback of energy efficiency investments;

2) The amounts by which Public Housing Authority (PHA) UA schedules overstate actual tenant utility burdens;


3) The number of units within a project with rents at their maximum regulatory caps or market rate limit; and,

4) The relative appeal of alternative UA calculation methods, in particular, the Actual Usage method.

By each of these measures, the ECM option is a viable and important alternative for LIHTC owners. The value of the ECM option is particularly high when transactional feasibility depends upon projected utility cost savings. This is true of retrofit financing and of many other transactions, such as preservation investments, that lack access to gap financing. To work as a financial leveraging strategy, ECM administrative procedures and policies must be developed to ensure that consumption projections are accurate and that the assumptions underlying these projections are well understood by developers and their financing partners.

Based on DRA’s limited survey of the administrative practices of state allocating agencies with regard to the ECM and utility allowance policy in general, it appears that, to date, no consensus has emerged on protocols or best practices with regard to producing accurate estimates under the ECM option. Neither does there appear a concerted effort among allocating agencies to promote conservation through the ECM option, with the exception of the California Utility Allowance Calculator (CUAC) program, administered by the California Energy Commission (CEC) and the California Tax Credit Allocation Committee (TCAC). No other state employs an ECM administrative strategy that is as sophisticated as or conceptually similar to CUAC.

WSHFC has expressed interest in the concept of a utility calculator and the potential value of developing a similar tool for use in Washington. This report concludes that a utility calculator developed in tandem with appropriate administrative rules and procedures has the potential to significantly improve the implementation of the ECM option and thereby promote greater investment in energy and water conservation measures.

The benefits of a utility calculator become more pronounced the more WSHFC seeks to promote policies and initiatives that leverage investment in affordable housing by monetizing utility cost savings. In order to undertake such financing at scale, WSHFC will need to collect and analyze data to serve as a foundation for forecasting conservation performance and establishing and improving underwriting guidelines. A utility calculator designed with this functionality will allow WSHFC to assemble data in support of large-scale programs that monetize utility cost savings.


The costs of a utility calculator program require further study. As discussed herein, CEC may be willing to share its CUAC software with WSHFC at no cost, substantially reducing the front-end implementation costs. However, a utility calculator program is subject to risks and uncertainties as the benefits are not guaranteed.

The final section of this report proposes a series of “next steps,” encompassing recommendations for further study to better understand and mitigate these risks and reduce the uncertainties.

Key Findings

The Energy Consumption Model (ECM) method can have considerable value to owners, WSHFC, and local housing agencies. It can be a valuable tool to finance energy efficiency and renewable energy retrofits, reduce reliance on limited government resources for affordable housing, and improve financial feasibility of LIHTC transactions. It will also prove useful in “Year 15” LIHTC transactions. The ECM model is a valuable preservation tool for properties in strong rental markets where project rents are more likely to be at their regulatory caps.

This report found principal advantages and disadvantages of using a utility calculator tool, similar to the CUAC, as an ECM administrative strategy.

Advantages

Principal advantages of a utility calculator include:

1. More accurate utility tariff information;

2. More reliable energy consumption estimates; and,

3. A more transparent and understandable process for computing utility allowance estimates, underwriting and financing energy efficiency and renewable energy retrofit costs.

Disadvantages

The principal disadvantages of a utility calculator are related to cost and that the benefits of the ECM calculator options may not fully materialize.


Costs include front-end development and ongoing maintenance/administration.

Conclusion

The potential advantages of a utility calculator surpass the disadvantages. However, these advantages, or benefits, are not guaranteed. Much of this uncertainty can be attributed to the newness of the utility calculator model. If WSHFC chooses to implement a utility calculator program, it should design an approach which best meets State policy goals.

This report suggests next steps for further exploration and development of a utility calculator model for Washington State.


1 Introduction

1.1 Federal Utility Allowance Regulations

26 C.F.R. 1.42-10 of the Internal Revenue Code regulates procedures for determining utility allowances (UA) on low income housing tax credit (LIHTC) projects. Until recently, owners of LIHTC properties that were not subject to rules for calculating UAs under rental assistance programs of the Farmers Home Administration and HUD, were limited to two options for establishing UAs: Public Housing Authority (PHA) UA schedules established for the Section 8 program or local utility company estimates. In July 2008, the Internal Revenue Service (IRS) amended Section 1.42-10 to permit three additional calculation options.

1. Agency Estimate or Actual Usage. This option allows the owner to request a UA from the local agency (PHA) with jurisdiction over the LIHTC building. The regulations outline two approaches for establishing an agency estimate:

a. Agencies may establish UAs based on estimates that are derived from relevant data, including utility rates, property type, climate conditions, and local taxes and fees.

b. The agency may also use actual building usage data. Usage-based UAs must be derived from 12 months of building consumption data. Consumption data may be based on an appropriate sample of the project’s units as determined by the local PHA.

2. HUD Utility Schedule Model. The building owner may calculate UAs using the “HUD Utility Schedule Model,” which is based on data from the Department of Energy’s Residential Energy Consumption Survey (RECS).

3. Energy Consumption Model (ECM). A building owner may calculate UAs using energy, water and sewage consumption estimates. The ECM must take


into account factors including unit size, building orientation, design and materials, mechanical systems, appliances and characteristics of location (Modeling Factors). ECM estimates must be calculated by a properly licensed engineer or a qualified professional approved by the allocating agency.

1.2 WSHFC Utility Allowance Policy

Appendix O of the Tax Credit Compliance Procedures Manual (CPM) describes WSHFC’s UA policies and procedures, which incorporate in full the options detailed in Section 1.42-10. The CPM notes that owners who use UA methods established under Section 1.42-10 before the 2008 amendment require minimal review, while options established by the 2008 amendment require higher levels of review by WSHFC to assure accuracy of the estimates.

Under the Agency Estimate/Actual Usage option, the CPM provides owners with two choices: “Owner Estimate, Similar Buildings,” and “Owner Estimate, Actual Usage Data” (OEAU). While the CPM refers to these as “owner estimates,” the approval of these estimates are subject to the due diligence review of WSHFC staff, and accordingly must fulfill the IRS’ Agency Estimate standards.

WSHFC also permits owners to use the HUD Utility Schedule Model. Under this option owners must document all model input factors, and WSHFC must approve the UA prior to implementation.

According to the CPM, projects with less than one full year of operations after placement in service are excluded from using the OEAU and ECM methods of calculating UAs. However, WSHFC now grants exceptions to this policy, allowing owners to use ECM estimates when a project is placed in service. When the ECM is used at placement in service, owners must provide actual usage data after the project has achieved one full year of stabilized operations. In addition, all projects using the ECM, both new and existing, must provide actual usage data every four years. Owners must justify material variances between ECM estimates and actual usage data; otherwise WSHFC may require them to revise UAs to more closely align with actual usage results.

Although not directly addressed in the CPM, WSHFC permits the use of ECM estimates during the underwriting phase of an LIHTC development; however, it was noted that owners typically prefer to use the more conservative PHA UAs for underwriting purposes. This strategy allows owners to capture cash flow if UAs are subsequently reduced using the ECM or other methods.


1.3 Overview of other State ECM Policies

This report examines strategies for implementing the ECM, with particular attention given to the California Utility Allowance Calculator (CUAC) program, a UA estimation tool developed by the California Energy Commission (CEC) and the California Tax Credit Allocation Committee (TCAC). DRA’s survey of other allocating agencies’ ECM policies uncovered a variety of administrative strategies and procedures, but none approach the level of sophistication or are conceptually similar to the CUAC program.

The ECM option presents a unique challenge to LIHTC allocating agencies because it requires them to establish new due diligence and underwriting protocols where none previously existed. To date, no consensus has emerged on protocols or best practices. States hold divergent views on the merits of the ECM. Ohio and Michigan prohibit ECM-derived UAs. Actual usage options are prohibited in California and discouraged in Kentucky, largely because they believe the option to be more costly to the owner. Ohio and Texas staff, on the other hand, have concluded that the ECM method is likely to cost more than the actual usage options.

1.4 Economic and Policy Benefits of the ECM

A utility calculator such as one based on the CUAC model is essentially a tool used to administer the ECM option. As such, an analysis of its merits must begin with an assessment of the potential value of the ECM option to LIHTC owners. The value of the ECM option hinges chiefly on four variables:

1) Washington State utility costs and the potential economic payback of energy efficiency investments;

2) The extent to which PHA UA schedules overstate actual tenant utility burden;

3) The number of units within a project with rents at their maximum regulatory caps or market rate limit; and,

4) The extent to which alternative UA calculation methods, in particular the Actual Usage method, represent competing and more viable alternatives to the ECM.


As discussed in Section 4.1, the evidence suggests that by each of these measures the ECM option is a viable and important alternative for LIHTC owners.

The ECM can also advance certain public goals, including:

! Increased investment in energy efficiency, renewable energy and water conservation resulting in reduced energy consumption;

! Improved project cash flow and financial stability;

! Increased leveraging of LIHTCs and other public funds with private loan funds;

! Increased private financing to support affordable housing preservation through retrofits; and,

! Energy cost savings for market rate tenants (in mixed-income LIHTC developments) and for tenants in regulated units whose rents fall below their regulatory caps, or, alternatively “green lease” opportunities for such tenants, in which they share utility cost savings with their landlords.

For the most part, the goals enumerated above employ financial leverage. Table 1 illustrates the leverage potential of WSHFC’s LIHTC portfolio under monthly UA reduction assumptions of $20, $30, $40, $50 and $60.


Table 1: Leveraging Potential of Monthly Utility Allowance Reductions ($)

Monthly Utility Allowance Reduction 20 30 40 50 60

Additional Monthly Debt Service Payment1 17 25 33 42 50

Loan Per Unit2 2,505 3,758 5,010 6,263 7,515

Annual Leverage w/ 1,400 Units at Maximum Rents2,3 3,507,177 5,260,765 7,014,353 8,767,941 10,521,530

Pre-2002 Portfolio Leverage w/ 9,000 Units at Maximum Rents2,4 22,546,135 33,819,203 45,092,270 56,365,338 67,638,406

Source: WSHFC data files; DRA. 1 Debt service payment amount is based on a 1.2 debt coverate ratio. 2 All loan/leverage calculations based on interest rate of 7% and 30 year amortization period.

3!Assumes that 3500 new LIHTC units are approved annually, and that the rents on 1,400, or

40 percent, of these units are at their regulatory caps. 4Pre-2002 projects are selected to estimate near-term preservation and retrofit opportunities. According to WSHFC data files, there are 28,060 pre-2002 units in its LIHTC portfolio. Based on the AMI distribution of units approved over this time period, 9,000, or 32 percent, of unit rents are estimated at their regulatory caps.

This analysis looks at leverage on a per unit basis, in the context of WSHFC annual LIHTC unit production and with regard to WSHFC older, pre-2002 LIHTC portfolio. It may be unrealistic to expect average utility allowance reductions to exceed $30 on an annual or portfolio-wide basis. Thus, the larger leverage figures should be viewed cautiously. However, at a project level, $60 reductions may be attainable in certain cases.

The leverage potential of UA savings is an important and largely untapped affordable housing investment resource.


1.5 The Functions of a Utility Calculator

The benefits of a utility calculator similar to CUAC as a tool for administering the ECM are more difficult to quantify and assess. Potential utility calculator benefits include:

! More reliable and transparent ECM calculations;

! Reduced owner compliance cost; and,

! Reduced WSHFC administrative costs.

Given that both the ECM option and CUAC are new, as are the various other methods for implementing the ECM option, it is not possible at this point to make definitive conclusions about the relative advantages and disadvantages of CUAC. Nevertheless, the benefits of a utility calculator, while speculative, are potentially significant. A utility calculator administered in conjunction with thoughtfully designed and well-documented policies and procedures is likely to inspire greater confidence in ECM estimates among developers, lenders, LIHTC investors and tenants. This in turn should lead to more investment in energy efficiency, renewable energy and water conservation.

DRA’s analysis evaluates merits of using a utility calculator tool similar to CUAC to administer the ECM option. DRA’s analysis includes a review of alternative ECM implementation procedures. We detail the CUAC software model itself, and the administrative and compliance procedures that TCAC and CEC developed in support of CUAC.


2 Case Studies

As noted above, DRA’s review of state allocating agency ECM policies and procedures did not uncover a clear consensus on best practices. In many instances, allocating agency written documentation regarding ECM policy mirrors the IRS’ regulatory language and, as such, perpetuates its ambiguities.

In addition to TCAC/CEC, DRA interviewed four state allocating agencies: the Kentucky Housing Corporation (KHC), the Florida Housing Finance Corporation (FHFC), the Ohio Housing Finance Agency (OHFA) and the Texas Department of Housing and Community Affairs (TDHCA). In addition, DRA had email exchanges with the Minnesota Housing Finance Agency (MHFA). MHFA reported that it has yet to process an ECM request and that most owners continue to use PHA schedules. Accordingly, we did not interview MHFA. The National Council of State Housing Agencies referred DRA to: KHC, OHFA, TDHCA and MHFA.

2.1 Kentucky Housing Corporation

The KHC interview was conducted with Michael Dant, Asset Analyst.

Kentucky approved 28 ECM and 10 Actual Usage requests over the past year. Nearly all requests were from existing stabilized projects. KHC’s ECM procedures for existing projects require owners to use an approved engineering firm to conduct an analysis using a nationally recognized model and to simultaneously present actual consumption data on the project. KHC uses the actual data to verify the reliability of the ECM outputs. Generally, if ECM estimates are within 10 percent of the actual consumption amounts, KHC will approve the ECM energy consumption estimates. If the variance is more than 10 percent and the engineer believes that the ECM is more representative of a typical year, a detailed explanation must be provided for the variance. Once every 10 years owners must re-verify their ECM estimates with actual consumption information. Mr. Dant noted that a principal advantage of the ECM option over the agency estimate


option is that actual consumption is verified only once every 10 years under KHC’s ECM policy, as opposed to every year under its Actual Usage rules.

Relatively few projects have applied for ECM UA approval during the underwriting phase. Those that do so must provide actual consumption data from a similar property. They must then re-verify the model with actual consumption data from the completed project after it has maintained stabilized occupancy over 12 consecutive months.

In collecting actual consumption data on properties, KHC requires owners to supply information on 40-50 percent of the units for projects of 10 units or less and 25% of the units for projects with 10 or more units. Sampling percentages must be applied to each bedroom type.

KHC staff review and approve UA submissions. The review process includes a comparison of model estimates with actual usage data; verification that consumption data were based on appropriate unit sampling; confirmation that required tenant notification procedures were followed; and verification that the correct utility tariffs were used for the allowance calculations. Among the most common problems uncovered in this review process involve the use of incorrect tariffs, which was attributed to the complexity of utility tariffs.

According to Mr. Dant, once ECM estimates have been approved, compliance issues are not materially different than compliance issues encountered under other UA options. For example, even if a re-verification analysis shows actual usage to be more than 10% over estimates and as a result of this KHC increases UAs, this would not be considered noncompliance.

2.2 Florida Housing Finance Corporation

The FHFC interview was conducted with Robin Grantham, Compliance Monitoring Administrator, and Matt Jugeheimer.

FHFC has approved seven ECM proposals to date, all of which were on existing projects. This year a few new projects have applied. FHFC’s principal method for assuring quality control is through the approval of engineering firms, selected by FHFC though an RFQ process. FHFC does not verify that correct utility rates were used.


2.3 Ohio Housing Finance Agency

The OHFA interview was conducted with Brian Carnahan, Director, Office of Program Compliance and Betsy Krieger.

OHFA prohibits the use of the ECM option, but allows owners to use the Agency Estimate (AE) Actual Usage options. Until May 2011, however, the AE option could only be used on existing properties. OHFA reports that very few owners have chosen to use the AE option. Most continue to use PHA schedules, even though prior to the new regulations owners frequently complained the PHA UA estimates were too high. Low participation may in part be a reflection of lower natural gas prices and perceived administrative costs associated with actual usage data collection.

OHFA’s AE policy requires owners to update usage and utility rate data annually. The unit sample size must be 40 percent of each unit type. If the project has fewer than 20 units, usage data must be provided on all units. For projects with 20 or more units, there are no specific procedures in place to prevent owners from “cherry-picking” their 40 percent by including units with the lowest levels of energy consumption. Owners may obtain utility records from utility companies or directly from tenants. OHFA has posted a form on their web site called Permission to Obtain Utility Records, which when signed by a tenant, authorizes the utility company to release the tenant’s utility records. It was noted that some utilities are more cooperative than others in supplying tenant records.

2.4 Texas Department of Housing and Community Affairs

The TDHCA interview was conducted with Patricia Murphy, Chief of Compliance and Asset Oversight.

TDHCA allows all UA calculation methods, but reports that, to date, it has received only one ECM request. It has processed a large number of actual usage requests. Actual usage data must be supplied by the utility providers, and it must be provided on all units for which data is available, but at a minimum five of each unit type or 20 percent of each unit type, whichever is greater.


3 California Utility Allowance Calculator

DRA conducted interviews with three individuals regarding the California Utility Allowance Calculator (CUAC): Adrian Ownby, Energy Commission Specialist at CEC; Ammer Singh, Compliance Program Manager at TCAC; and, Nehemiah Stone, Principal at Benningfield Group, an energy consulting firm. Mr. Ownby oversees the development and administration of CUAC. Mr. Stone consults on the development and administration of CUAC. He also provides CUAC training for energy consulting firms and TCAC staff.

3.1 CUAC Program Background and Goals

The CEC developed CUAC with the assistance of TCAC to allow energy consultants to provide more accurate project-specific estimates of tenant-paid utility expenditures, taking into account a building’s energy and water utilization features, the presence, if any, of solar PV systems, and applicable utility tariffs. Owners that elect the ECM UA estimate option must use CUAC. TCAC, which first introduced CUAC in its 2009 funding cycle, has approved approximately 30 CUAC ECM estimates to date. TCAC does not offer an agency estimate option for calculating UAs, and CUAC was not designed to support this option.

The current version of CUAC (and the ECM option) may only be used for new construction and substantial rehabilitation projects, as the CUAC program contains as-built verification requirements. The CEC and TCAC plan to introduce guidelines for the use of CUAC on existing projects later this year.

3.2 How CUAC Works

CUAC does not estimate energy consumption attributable to heating, cooling and water heating. Energy consultants must use third party software models approved by the CEC to develop these estimates. The energy consumption estimates (i.e. the “outputs”) generated by these third party models become CUAC inputs. CUAC


does calculate energy use related to appliances, lighting and miscellaneous uses (factoring in the use of Energy Star appliances and energy efficient lighting). It also calculates water consumption based on a usage assumption of 65 gallons per person per day, and on the additional assumption that the number of unit occupants will be 1 person plus 1.5 times the number of bedrooms. Energy consultants may override the CUAC default water consumption estimate provided they have reliable data substantiating that tenants will use different amounts, and that they submit documentation to TCAC justifying their estimates.

A key feature of CUAC is its tariff database which links consumption estimates, provided by energy consultants or through the CUAC model as described above, with local electric and natural gas tariffs. CUAC also provides a single propane rate, which is based on average statewide propane rates and adjusted on an annual basis. CEC has determined that, given the many water utilities in California, it is not practical to monitor water rates. Therefore, energy contractors must enter water rates into CUAC.

3.3 CUAC Process, Rules and Administration

3.3.1 Selection Criteria for Energy Consulting Firms

TCAC requires that the signing consultant be California Association of Building Energy Consultants Certified Energy Plans Examiner (CEPE) qualified and either Home Energy Rating System (HERS) rater or a California licensed mechanical engineer or electrical engineer.

3.3.2 Monitoring Utility Tariffs

CEC updates tariff rates quarterly. Annual weighted average rates are used for natural gas because of the volatility of natural gas prices. Electric rates are based on current tariffs levels. CEC estimates that the tariff update process takes about 40 hours a quarter. Various factors contribute to complexity and time needed to accurately update tariffs. These include tiered pricing, local usage taxes and fees, and reduced rates available to low income tenants under California’s CARE program. The current version of CUAC is not equipped to handle local user utility taxes, which vary widely by jurisdiction and are assessed at both city and county levels. The new web-based version of CUAC has been designed to fix this shortcoming by using League of California Cities data.


California does not have a central repository for utility rates. Current utility rate data must be collected by CEC staff by monitoring individual utility company websites. One disadvantage of this method is that utility companies do not always update rates on their web site concurrently with rate changes.

3.3.3 Owner Submission Requirements

TCAC allows three types of CUAC estimates, each produced at different points in the life of a project. A stage 1, or draft, estimate may be produced at the time of the initial LIHTC application. TCAC can, at the request of the owner, use this draft UA to underwrite the project. The stage 2 estimate is mandatory and, must be submitted by the energy consultant to TCAC for review and approval at the placement in service. The stage 2 submission represents the project “as built,” as opposed to “as proposed” and, as such, is treated as the “locked-in-place” version of CUAC. Finally, an energy consultant must produce an annual CUAC estimate throughout the compliance period. This simply requires the energy consultant to rerun the calculator to update utility allowances to reflect current utility rates.

3.3.4 TCAC review

TCAC staff review the stage 2 submission to verify that proper back-up documentation has been provided to substantiate the underlying assumptions (the inputs) of the energy consultant’s energy consumption model, and to confirm that the outputs of the consultant’s model match the energy consumption estimates entered into CUAC.

The TCAC review has been designed to be brief, taking on average about two hours.

If specific technical questions arise that TCAC staff are not qualified to address, questions are forwarded to CEC or an outside consultant retained by CUAC. TCAC staff attended a half-day training session that provided instruction on these review procedures.

3.4 Existing Buildings Policies

As noted, TCAC does not currently allow owners to use CUAC on existing buildings. CEC and TCAC plan to introduce a new version of CUAC this summer. In their view, existing buildings present quality control challenges because energy


efficiency measures can be difficult to verify if architectural and construction records are not available or if energy efficiency improvements were not verified during construction. CEC is currently drafting procedures for existing buildings to address these quality control risks.

For existing buildings that are not undergoing an energy retrofit, these new procedures will require energy consultants to verify building energy features through approved sampling procedures. Where certain elements cannot be verified, the guidelines will require energy consultants to make conservative default assumptions based on the vintage of the building. Procedures for buildings undergoing energy retrofits are expected to be similar to current procedures for new construction/substantial rehabilitation projects.

3.5 CUAC’s New Online Interface

The current version of CUAC runs locally on PCs, using Microsoft Access. Users must download utility tariff data files. Since CEC updates these data files quarterly, users must frequently download these files to assure UA estimates reflect current utility rates. CEC plans to introduce a new online web-based version of CUAC (CUAC v.2) this summer in which users will input building and consumption data through a web interface. The utility rate database will be housed on CEC’s server, assuring that estimates will always reflect the most current rates.

CUAC v.2 will also be more accurate by having tier break points for up to five tiers in the database and by allowing more flexibility for creating special situation rates and tariffs. These result in more complexity at the front end, but, according to CEC, not appreciably more work to maintain the database as baseline and tier break points do not change frequently.

CUAC v.2 will continue to have energy analysts input the water rates. However, data entry options will become more flexible by allowing for tiered water rates.

CUAC v.2 will include two types of accounts, each providing a different level of user access. General users will have open access accounts through which they will be able to produce draft utility allowance estimates. General users might include developers or architects who want to produce draft calculations to test hypothetical assumptions. Only users with “Active” restricted access will be able to produce final/official utility allowance estimates. Active account holders must be authorized by CEC, and must at a minimum be a CEPE, who is also either a HERS rater or a licensed California mechanical or electrical engineer. CEC designed the dual account system to promote interest and transparency among


non-energy consultants while at the same time allowing more control over who produces the final estimate. CEC noted, for example, that through the online version of CUAC they will be able to suspend or decertify Active users for cause.

3.6 Cost of Developing and Administering CUAC

CEC estimates that the third party costs of developing the new web-based version of CUAC will be approximately $150,000. Both Mr. Ownby and Mr. Stone indicated that the CUAC v.2 software could be easily adapted for use in other states. Moreover, CEC owns the software, and according to CEC staff, there are no licensing restrictions that would prevent CEC from sharing the software with other jurisdictions. This could substantially lower the front-end cost of implementing a similar program in Washington. Principal administrative costs include one full-time staff person at CEC and an outside energy consultant available (but to date rarely used) to assist TCAC staff with technical issues they are unqualified to address.


4 Issues and Considerations Regarding Use of a Utility Calculator in Washington State

A utility calculator is a tool for implementing and administering the ECM UA option. WSHFC should consider developing a utility calculator if it wants to promote the ECM option for public policy reasons, and if owners will want to use this option for transactional reasons. Thus, evaluating a utility calculator as a tool is in part an assessment of the specific merits of the ECM option, and in part an evaluation of the potential efficacy of a utility calculator compared to other methods of implementing and administering the ECM option.

4.1 Appeal of the ECM Option to Owners

Section 1.4 notes that for owners, the economic value of the ECM hinges on four principal variables:

1. Washington State utility costs and the potential economic payback of energy efficiency investments;

2. The amounts which PHA UA schedules overstate actual tenant utility burdens;

3. The number of units within a project with rents at their maximum regulatory levels and with respect to which owners could increase rents if utility allowances fall; and,

4. The relative appeal of alternative UA calculation methods; in particular, the Actual Usage method.


4.1.1 Utility Cost Structure

Utility cost structure is an important factor in weighing the benefits of energy efficiency investments and using the ECM option. It is also highly relevant to WSHFC’s decision about whether or not to invest in a utility calculator. In this regard, it is instructive to compare Washington and California utility costs. The comparison is important because if tenant utility burdens are significantly higher in California, then it is reasonable to argue that California has more compelling economic reasons to invest in a utility calculator tool.

DRA’s comparison of tenant utility costs in California and Washington suggest tenants in the two states experience similar utility burdens. While there are significant differences in utility tariff structures between Washington and California, there is no strong evidence to suggest that this translates into material differences in monthly household utility costs. For example, in 2009 the average residential retail price for electricity (cents per kilowatt-hour) was 13.81 in California and 7.54 in Washington, yet average monthly electric bills in the two states were nearly identical: $81.10 in California (where average monthly residential consumption was 587 kwh) and $81.79 in Washington (where average monthly residential consumption was 1,086 kwh). In addition, Washington State’s natural gas tariffs are substantially higher than California’s, which in 2009 were $13.95 and $9.43 per thousand cubic feet respectively.

Finally, in a limited sample review of PHA utility allowance schedules, DRA found that low income rental households in the two states share relatively similar utility burdens. This can be seen in Table 2 which compares electric and water utility allowances published by a small sample of PHAs in both states.


Table 2: PHA Electric Monthly Utility Allowances ($) for 1 Bedroom Units in Multifamily Buildings, Among a Sample of PHAs in California and Washington jurisdictions

Utility Category PHA Monthly Utility Allowance ($)

Oakland CA

Sacramento CA

Spokane WA

Pierce County WA

Seattle WA

Electric Cooking 5 12 5 5 3

Electric Heating 12 12 18 23 23

Electric Hot Water 12 15 17 8 6

Standard Electric 20 24 19 17 9

AC 0 8 0 0 1

Electric Service Charge 0 7 0 0 3

Water/Sewer 57 49 81 44 59

Total 106 127 140 97 104

Sources: Oakland Housing Authority (2010), Sacramento Housing and Redevelopment Agency (2010), Spokane Housing Authority (2011), Pierce County Housing Authority (2010), Seattle Housing Authority (2009); DRA.

The variance between the two states may be less than expected because of climate, and because tiered pricing in California may shift a disproportionate share of the state’s overall utility cost burden to single-family homeowners.

DRA was not able to find comparative water/sewer tariff and household expenditure data. However, as shown in Table 2, using PHA utility allowance schedules as a proxy measure for residential water/sewer expenditures, it is clear that major population centers in both states experience comparable residential water/sewer cost burdens. More importantly, water represents the highest cost utility allowance category. According to WSHFC, increasing water rates throughout the state of Washington are driving many LIHTC owners to individually meter water, through both retrofits of existing projects and in the design of new properties. Thus, while individually metered water systems may be relatively uncommon now, they will likely become increasingly common in the future.1

1 Individual metering of water may present unique and challenging fairness issues regarding leaks. What happens when tenants pay for water, but landlords are responsible for fixing leaks?


The discussion above suggests that Washington and California are likely to experience similar reductions in UAs by using ECM option, and that California is not uniquely positioned by virtue of its utility rate structure to benefit from the ECM option or a utility calculator.

4.1.2 PHA Estimates

According to data from WSHFC, there were significant UA reductions on all 14 LIHTC projects that received UA adjustments under the Actual Usage or ECM methods, with median reductions at the project level for studios, 1br, 2br, 3br and 4br apartments of 25 percent ($13 per month), 28 percent ($15 per month), 32 percent ($25 per month), 37 percent ($31 per month) and 42 percent ($59 per month) respectively. Overall, utility allowance reductions ranged from $2 to $62 per month.

The UA reductions of the magnitude shown above are large enough in absolute dollar terms to earn the attention of owners. Of course, these above 14 projects are a self-selected group, with something to gain by switching to one of the new UA calculation methods. Determining whether this group is representative of WSHFC’s LIHTC portfolio would require additional research.

4.1.3 Units at Maximum Rents Allowed by Regulation

WSHFC does not collect data on the number of LIHTC units with rents at the maximum levels allowed by regulation. However, it is possible to estimate this number by looking at the AMI set-aside distribution among the units comprising WSHFC’s LIHTC portfolio. This analysis appears in Table 3.


Table 3: Estimated WSHFC LIHTC Units at Maximum Regulatory Rents

Area Median Income Set-Aside (%)

WSHFC LIHTC Portfolio 30% 35% 40% 45% 50% 60% Total

Total Units1 4,673 937 3,662 1,648 12,005 30,614 53,629

Portfolio Distribution1 9% 2% 7% 3% 22% 57% 100%

Estimated Annual Distribution2 311 61 239 108 783 1,998 3,500

Estimated % of Units at Regulatory Caps

100% 100% 100% 90% 60% 15%

Estimated Units Approved Annually at Regulatory Caps

311 61 239 97 470 300 1,478

Source: WSHFC data files; DRA. 1Distribution by AMI of units subject to LIHTC regulatory agreement and awarded credits between 1987 and 2009. 2Estmated annual AMI distribution based on the assumption of 3,500 new LIHTC units annually, based on the historic Portfolio Distribution. 3Estimate of units at their regulatory caps at each AMI set-aside.

Table 3 assumes that WSHFC approves on average approximately 3,500 new LIHTC units per year, and that new units are distributed by AMI set-aside in accordance with the Portfolio Distribution. DRA’s estimate of the percentage of units at their regulatory caps is based on the assumption that rent increases on the lower AMI units are constrained by regulation rather than market. Rent increases at the higher AMI set-asides are limited by market conditions, leading to rents that are typically lower than their regulatory caps. Based on the assumptions in Table 3, the number of LIHTC units approved each year at their regulatory caps will be approximately 1,478, or 42 percent of total units. While approximations, these figures clearly suggest that rents could increase on a significant portion of the units in WSHFC LIHTC portfolio if UAs decline.

4.1.4 Alternative UA Estimate Options

The Actual Usage and ECM options represent competing approaches to reducing utility allowances on energy efficient properties, but in many circumstances actual usage options are not realistic. This is most clearly true of new projects and of


existing projects that want to finance energy retrofits with projected energy cost savings.

Another important consideration for owners is that the Actual Usage and ECM options have different costs.

The ECM option requires a front end expenditure of approximately $5,000 to $7,000. In addition, under WSHFC policy the owner must provide actual usage data on a portion of the project’s units after it has achieved twelve months of stabilized occupancy (if it is a new project). Thereafter, it must provide similar actual usage data every four years.

Under the Actual Usage option, owners are required to supply actual usage data annually on all units, but they incur little or no front-end costs. The cost of securing actual usage data can vary, depending on whether the owners can secure usage data from the local utility or if they must obtain utility bills from tenants. We understand that utility companies are frequently uncooperative, forcing many owners to obtain utility information directly from tenants. This would likely increase the annual cost to owners of providing actual usage data. Our discussions with state allocating agency officials suggest that both owners and state agency staff are divided in their beliefs about which approach is most cost-effective, and that state policies and procedures are an important factor in determining which approach is more costly.

Based upon the four variables identified at the beginning of Section 4.1, the ECM option should have considerable value to many LIHTC owners. This conclusion, however, should be accepted with one caveat: the scope of this study did not allow DRA to fully investigate the extent to which Washington State PHAs overestimate tenant utility burden.

4.2 Accuracy of Estimates

Since WSHFC requires usage data on 100 percent of the units under its actual usage option, this approach would appear to yield more accurate estimates compared to ECM. However, this practice has a notable shortcoming in that it subjects utility allowance estimates to variations in tenant utility usage behavior as opposed to using an objective standard that is based on the consumption habits of a reasonably conservative/conscientious tenant. Given WSHFC’s policy of requiring users of the ECM method to “reality test” their estimates every four years, the ECM option would appear to yield comparable levels of accuracy while


mitigating much of the risk associated with tenant behavior; Kentucky requires owners to collect actual usage data every ten years.

4.3 Underwriting and Leverage

The ECM is a mechanism that should allow developers to incorporate energy efficiency and renewable energy improvements into the assumptions of their development pro formas. Where utilities are paid by the tenants, this assumption will be reflected as higher rents on those units where rents are capped at their regulatory limits, but that are otherwise below market. This creates the potential for increased private financing and reduced dependency on scarce public subsidies. According to WSHFC and other state housing officials, developers are reluctant to use ECM UA estimates in their development pro formas. Allocating agencies do not appear to require or encourage underwriting based on ECM estimates. Developers will not always have access to soft debt, or they may encounter feasibility issues even with maximum LIHTC allocations. As discussed in Section 4.5, under such circumstances developers have a strong incentive to use ECM estimates in their development pro formas.

4.4 Retrofit financing

Financing for EERE retrofits on existing properties presents possibly the most useful application of the ECM method, as a key feature of most retrofit financing strategies is their reliance on the monetization of projected utility cost savings to finance retrofit costs.

4.5 Developer, Investor and Lender Incentives and Barriers to Participation

Developers will on occasion, often out of necessity, want to use ECM estimates in their development pro formas. Developers might, for instance, use ECM estimates to erase funding gaps or to demonstrate higher debt coverage potential. Understandably, there appears to be a strong preference among developers, and to some extent among state agency staff, to use more conservative PHA utility allowances for underwriting purposes, and to switch to the ECM or actual usage methods after financing has closed. In such instances, the project’s owners, both general and limited partners, are likely to be the principal if not sole beneficiaries of the increased cash flow arising from utility allowance reductions. The magnitude of this cash flow boost can be large or small, depending on the specifics of a project. In most instances the potential for increased cash flow on any given


project can be anticipated up front and may, depending on this upside potential, warrant special underwriting attention. For example, projects that have high UAs and a large portion of unit rents at their regulatory limits may experience a substantial boost in cash flow.

Many developers, lenders (private and public), and investors believe that it is risky to underwrite ECM estimates, as use of the ECM at this stage gives rise to cash flow and compliance risks. However, compliance risk may be more a matter of perception than reality. State allocating agencies must approve ECM estimates before an owner can implement them. An ECM estimate approved during the underwriting phase is provisional in places like Washington State, where UAs are subject to adjustment pending the review of actual usage data. If actual usage data show the provisional estimates to be materially inaccurate, these facts alone would not, according to officials we spoke with, constitute noncompliance. In this respect, compliance risk does not appear to be significantly greater under the ECM option.

However, there is the risk that state compliance officials will require owners to increase project UAs going forward based on the results of a post-stabilization actual usage analysis. Such an occurrence could significantly reduce project cash flow. In two of the states we spoke with, California and Florida, even this risk would appear to be relatively small because neither of these states require ECM users to collect actual usage data at any point in their compliance period. In these states the risk of flawed estimates falls more directly on the tenants, where they also assume more of the burden of proving that the estimates are flawed. Importantly, California’s procedures appear to be far more robust in the area of agency-level review of ECM estimates, and CUAC is an essential component of this review.

Where the underestimation of UAs is a concern, equity holdbacks or reserves could be used to mitigate this risk. For example, short term reserves could be released to pay developer fee or pay down gap financing if, after the review of actual usage data, WSHFC approves UAs as originally estimated under the ECM. These reserves could be sized based on the discounted present value of the difference between the PHA UA estimate and the ECM estimates.


5 Administrative Issues

5.1 Selection of Energy Consultants

The IRS regulations state that ECM estimates must be calculated by a “properly licensed engineer or a qualified professional approved by the Agency…” Most of the agencies we spoke with have used their guidelines to provide specificity regarding the definition of qualified professional. In most cases, this is a certified HERS rater. California requires that licensed engineers be mechanical or electrical engineers. Of the states we reviewed, only Florida used an RFQ process to qualify and approve energy contractors. While California’s rules allow anyone who meets its minimum qualification requirements to provide ECM estimates, CEC will have the ability to prevent professionals, who are otherwise licensed or certified, from using CUAC v.2 if quality of work issues arises with a particular firm or individual. CEC views this as an important quality control measure.

5.2 Costs of Developing and Administering a Utility Calculator Program

According to CEC, the cost of developing its web-based version of its utility calculator tool will be approximately $150,000. As discussed above, WSHFC might be able to acquire the basic software template at no cost. If interested, WSHFC would need to make the request through CEC. DRA can assist with this request. There will be front end costs related to installation of the program into WSHFC’s IT systems. There may be customization costs to reflect WSHFC’s requirements and preferences.

A utility calculator program will also give rise to costs related to collection and maintaining utility rate data. According to Adrian Ownby of CEC, this task occupies about 40 hours a quarter in California. WSHFC could also consider using an outside vendor to collect this data. Also as noted above, TCAC conducts internal reviews of ECM requests which require about two hours of staff time per


submission. On occasion, TCAC’s review uncovers questions or issues that require the attention of CEC and an energy consultant. We have been told by both TCAC and the energy consultant retained by CUAC to provide this service, that to date only a few submissions have required this extra level of review.

The Washington State Utility and Transportation Commission (UTC) regulates 71 water utilities and five private energy utilities (electricity and natural gas). UTC’s website provides links to utilities’ websites for rates, but it does not appear to provide rates directly. According to the Washington Public Utilities Districts Association (WPUDA), there are currently 28 PUDs. Of those, 23 provide electricity, 19 provide water or wastewater services. PUDs in Washington serve nearly one-third of the state’s residents and they provide electricity to more than 815,000 households. More than 113,000 households get their water from a PUD. PUDs serve more than half the state geographically. Like UTC, WPUDA provides links to utility websites where presumably rate information can be obtained, but rate information is not directly available on WPUDA’s website.

In some important respects, CUAC would appear to be more cost-efficient than WSHFC’s current ECM procedures. In particular, the CUAC program does not require the owner to produce or TCAC staff to review actual project usage data at any point during a project’s compliance period. Thus, once TCAC has approved the final ECM, the costs to the owners and TCAC staff would appear to be minimal. WSHFC policy requires owners to collect and WSHFC to review actual usage data at project stabilization and every four years thereafter.

In addition, WSHFC owners must collect actual utility rates every year and WSHFC must verify the accuracy of these submissions. Given the complex nature of utility tariff structures, collecting and reviewing these data could be time consuming. For example, there might be seasonal variations in utility rates, and the prices of certain utilities, such as natural gas, may be quite volatile over the course of a year. In addition, there may be changes in local utility taxes or in tiered rates. All the variables increase the likelihood that owners will make mistakes in their utility rate calculations and increase the need for a careful review of owner submissions by WSHFC staff. CUAC greatly simplifies this annual submission and review process.


6 Key Findings

The discussion above shows that the Energy Consumption Model (ECM) method can have considerable value to owners, WSHFC and local housing agencies. From a policy perspective, it can be a valuable tool to finance retrofits and reduce reliance on limited government resources. It can also improve the financial feasibility of LIHTC transactions, in particular 4 percent bond deals, with limited or no gap financing alternatives. Finally, it may prove useful in “Year 15” transactions, both in support of resyndications or conventional financing. The ECM method is a valuable preservation tool for properties in strong rental markets where project rents are more likely to be at their regulatory caps.

This section looks at the advantages and disadvantages of using a utility calculator tool, similar to the CUAC, as an ECM administrative strategy.

6.1 Advantages

Given the newness of the ECM option, it is difficult at this point to quantify the advantages and disadvantages of CUAC relative to alternative administrative approaches. However, CUAC appears to offer several advantages over the other ECM polices DRA reviewed.

A utility calculator developed in tandem with appropriate administrative rules has the potential to significantly advance WSHFC policy goals for energy conservation and improved financial leverage for LIHTC properties. Principal advantages of a utility calculator include:

1. More accurate utility tariff information;

2. More reliable consumption estimates; and,

3. A more transparent and understandable process for computing UA estimates.


6.1.1 Accurate Utility Tariffs

A utility calculator tool similar to CUAC appears to be a more reliable method for obtaining accurate utility rate information. The scope of this study did not allow an investigation of the reliability of WSHFC’s current methods or measurement of the effort required by owners and WSHFC to assure adequate quality control. But it is reasonable to conclude that centralizing the function of collecting utility rate data will ease the compliance and review burdens of owners and WSHFC compliance staff.

It is possible such savings in time and effort will offset the costs to maintain a utility calculator, including maintaining the utility tariff database, software updates, modifications and training.

6.1.2 Reliable Consumption Estimates

CUAC provides the TCAC with a more consistent template for reviewing ECM estimates. This benefit will become more significant when the CEC and TCAC introduce CUAC v.2, which will assemble property-level data, energy consumption and utility allowance estimates into a single database. This will facilitate TCAC’s review of ECM proposals by allowing TCAC staff to compare estimates across property types, locations and other important measures. It might also prove useful in evaluating the comparative benefits of different energy efficiency, renewable energy and water conservation investments.

For WSHFC, the virtues of the CUAC model become more pronounced the more it seeks to use the ECM option in support of preservation and retrofit financing, and to promote additional leveraging on new LIHTC developments. These policy objectives are rooted in the strategy of monetizing utility cost savings. In order to enable such financing at scale, WSHFC will need to collect and analyze data to serve as a foundation for forecasting conservation performance, establishing and improving underwriting guidelines.

6.1.3 Transparency

Improved transparency may be one of the most important benefits of a utility calculator. Transparency in this context refers to greater understanding by non-energy professionals such as developers, lenders and investors of the costs and benefits of energy efficiency, renewable energy and water conservation


investments. This is evident in the current Access version of CUAC. It will likely become more apparent with the web-based CUAC v.2.

Robust data collection and analysis will promote transparency. This is especially true if WSHFC collects actual usage data along with building data and ECM estimates. Such information gathering and analysis will provide invaluable support for efforts to standardize the underwriting of energy efficiency, renewable energy and water conservation enhancements.

6.2 Disadvantages

The principal disadvantages of a utility calculator are related to cost. There is also the risk that benefits of the ECM calculator options may be less than they appear.

6. 2.1 Front-end and Administrative Costs

According to CEC officials, the initial cost of CUAC v.2 will be approximately $150,000. WSHFC’s cost for a similar product may be substantially less if CEC agrees to share CUAC v.2. Front-end costs include:

! Software customization and front-end IT. One significant software feature that WSHFC may want to add, which appears to be missing from CUAC, is the capacity to track actual usage data.

! Establishing a template and data collection methods for tracking utility tariff data.

On-going administrative costs include:

! Tracking utility tariff data. According to CEC, this activity requires about forty hours of CEC staff time per quarter in California. For reasons of scale, it is likely to cost less in Washington. The question requires an analysis of the relative complexity of tariff structures in the respective states, the amounts of data that must be collected, and the relative challenges of collecting such data.

! Software and website maintenance and upgrades.

! WSHFC staff and user training


! Professional energy/water consultant services. This will be a cost only if WSHFC wishes to emulate TCAC procedures. However, it is not clear that the use of a utility calculator increases the need for such services. Unlike TCAC, WSHFC requires actual usage verifications. This should lessen the need for specialized expertise in the areas of energy and water conservation.

6.2.2 Limited Benefits

This report examines the benefits of the ECM option and a utility calculator. In two key respects, these benefits may be overstated:

1. The extent to which Washington State PHAs overestimate tenant utility burden may be limited. The projects that have been through WSHFC’s ECM and Actual Usage approval processes experienced significant UA reduction. Their experiences may or may not be replicable for a significant portion of WSHFC’s LIHTC portfolio.

2. The reliability of owner-produced utility rate data may be adequate. The effort and cost of producing and verifying these data may not warrant the development and maintenance of a centralized system similar to CUAC.

Regardless, if WSHFC deems current procedure for collecting and verifying utility rate data to be adequate, then it remains worthwhile to develop a utility calculator for transparency, underwriting and portfolio analysis. In addition, even if PHA estimates are appropriate for a large portion of projects, it is unlikely this will be the case for post-retrofit projects.

6.3 Conclusion

The potential advantages of a utility calculator surpass the disadvantages. However, these advantages, or benefits, are not guaranteed. Much of this uncertainty can be attributed to the newness of the utility calculator model. Moreover, if WSHFC chooses to implement a utility calculator program, it should design an approach which best meets State policy goals.

The “Next Steps” outlined in Section 7 include recommendations for further study to better understand and mitigate these risks and to reduce the uncertainties.


7 Next Steps

If WSHFC wishes to pursue development of a utility calculator, the following next steps should be undertaken:

1) Assess reliability of current methods for collecting and verifying utility tariffs. Determine time and cost of collecting and verifying these data under current procedures.

2) Estimate costs to maintain a utility tariff database (either in-house or through a third party contractor), and to develop and maintain a calculator. Contact CEC regarding availability of CUAC software and cost, if any to WSHFC.

3) Further compare PHA UAs with the actual or estimated utility burdens of WSHFC LIHTC households, to better gauge extent of PHA UA overestimation.

4) Explore feasibility of undertaking a large scale retrofit program that targets WSHFC’s inventory of older LIHTC projects. The program will use the leveraging opportunities presented by the ECM option. This analysis will produce a better understanding of the pay-back potential of retrofit investments by project vintage. Develop retrofit financing strategies based upon these leveraging opportunities (e.g., resyndication, rebates, FHA PowerSaver loans, tax credits, increased NOI, IRC Section 45L, others).

5) Review and evaluate CUAC v.2 upon rollout.

In addition, DRA recommends WSHFC:

1. Update Appendix O of the CPM to reflect current utility allowance approval practices.


a. Revisions are warranted, for example, when current practice and documented policy are inconsistent, e.g., the language in Appendix O that prohibits use of the ECM option on projects with less than one full year of operations. Since WSHFC now grants exceptions to this policy, Appendix O could state that WSHFC permits use of the ECM during the underwriting phase, subject to any conditions it may impose.

b. Provide clearer guidance regarding the four year actual usage data submission and approval process. Such guidance can ease developer, lender and investor uncertainty regarding ECM estimates.

c. Clarify guidance on energy consultant qualifications.

2. Establish criteria for and consider pre-approving energy consumption software used by energy consulting firms. By restricting software options, WSHFC can ensure that consumption estimates are based on a uniform set of assumptions about tenant behavior, the energy efficiency performance of improvements, climate effects and more. Such restrictions will also discourage, if not eliminate, the practice of using multiple programs to model building energy performance, then selecting the model that yields the preferred results. DRA is concerned that this practice could undermine the integrity of energy consumption projections.

3. Explore opportunities to develop a “green lease” initiative. Employing the ECM option in the context of an energy retrofit presents an opportunity to use “green leases” on units where rent increases are constrained by market rather than regulatory factors. Green leases share the financial benefits of energy conservation with tenants and owners (general partners). Based on DRA’s analysis in Table 3, units with market-constrained rents represent the majority of LIHTC units in WSHFC portfolio. Furthermore, this analysis does not count unregulated market rate units in LIHTC developments, which also represent green lease prospects. LIHTC projects, with some unit rents capped by market and others by regulation, present unique opportunities to test green lease strategies. Owners will be guaranteed additional cash flow when UAs are reduced on units where rent increases are constrained by regulation. This will make owners more willing to experiment with green leases on the market-constrained units. If a utility calculator can help make utility cost savings understandable to tenants, it can become a valuable tool for a green lease program. Finally, green leases present another strategy for leveraging retrofit and preservation investments.